Is Return of Premium Term Insurance Right for You?

A normal level term insurance policy is fairly simple. You agree to pay a premium in exchange for an agreement that the insurance company will pay your family a death benefit in the event of your death. The premium that you pay is guaranteed to remain level for a period of time, often 10, 15, 20 or 30 years. After this level premium period is up, you have the choice of terminating the policy or keeping it.
If you choose to keep this policy in force, you will be faced with annually increasing premiums that will typically start at 10 times (or more) the level premium you had been paying. If you choose to surrender this policy, you simply walk away. You no longer pay the premiums and the insurance company is no longer obligated to pay a death benefit.
A Return of Premium (ROP) policy is similar to a regular level term policy, but with one important difference: at the end of the level term period, if the insurance company hasn't paid a death claim (i.e. you are still alive!) they will send you a check for the total of all of your premiums. These policies have premiums that are higher than their "non-return-of-premium" counterparts, but there is some value in having your premiums refunded to you if you don't pass away.
This product has been marketed in the past as "zero cost term insurance" or "free life insurance". Of course, this isn't a fair representation, because it ignores the time value of money (i.e. interest that you could have earned on the extra premium that these policies require). Nevertheless, buying a return of premium policy might be a good option for you.
Here are several things to think about, both positive and negative, when considering the purchase of an ROP policy:

• + The internal rate of return on the excess premium is often in the range of 7%.
• + Your premiums are returned to you tax free, making this rate of return even more attractive.
• + There is a "forced savings" component to these policies.
• - You often have to pay for these policies until the end of the level term period in order to have your premiums returned. If you don't, the value of the excess premiums you've paid is often wasted.
• - You may have alternative uses for the extra premiums (like paying down debt, investing, etc.) that make better financial sense for you.

 It is always good to have a professional life insurance agent and financial planner evaluate your situation before you decide.

It's vacation time, but here's a thought...

I'm going to make a long weekend of it and take a few days to recharge my batteries, but in the meantime here's a thought:
It is never too soon--or too late--to start planning for your future. Insurance products like life insurance, disability income insurance and annuities can play a key role in securing your (and your family's) financial plans.
For a free copy of any of our Life Guides, visit our website and request a copy. Life Guides are a form of checklist or questionnaire, designed to provide you with information and guidance on a variety of life events.

Topics Available
Financial Workbook
Managing Your Financial Life
Marriage and Money
Teaching Kids About Money
What to Do If You Lose Your Job
Dealing with Divorce
Thinking About Retirement
Retirement and Social Security
Retirement and Medicare
Planning Your Estate
Special Needs Children
Moving Day
Protecting Your Business
Business Continuation
Emergency Planning Guide
When a Loved One Dies
Managing an Inheritance


I will make these available via direct download from our website when I return next week. Until then, have a great weekend everybody!

The Life Insurance Agent's Job

The things I am about to describe really happened last week. I have changed the names and a few of the unimportant details to protect the privacy of everyone involved. So here is what happened...

One of my agents was following up on a request that someone had made on our website for term life insurance rates. As part of the follow up process, we routinely verify the information that was supplied online and also gather a few pieces of information that the online form does not ask (specific health issues, family health history, etc.). We do this so that we can do what is called "field underwriting". This process allows us to shop for the best carrier given an individual's unique situation. As independent agents, we shop the whole market and some carriers are better than others for certain situations. Prudential might be a better choice than ING for someone with a parent who died of cancer at age 62, Transamerica might be best for someone with a DUI 2 years ago, etc. We intentionally ask open-ended questions in an effort to gather as much detail as possible because it helps us to find the right choice for each consumer.

During the conversation, my agent asked the consumer about his family's health history with respect to cancer, heart disease and stroke. She left the question open-ended, not specifying an age, but just asking the consumer to tell her if there was any history and if so, what it was. The consumer became very agitated at her and abruptly ended the phone call, telling her that the questions weren't necessary or appropriate. I instructed my agent to send a short email to the consumer explaining our reason for gathering such information. Shortly after she sent that email, the consumer replied with an email telling her that her "open-ended questions were unreasonable and irrational" and that they "may be unethical because they intentionally place people in a higher rate group leading to higher insurance rates, generating more profits for the company and a disservice to the consumer".

Okay folks, here's the deal: As agents, we don't set rates or determine what rate group an individual is in! That is the job of the insurance company's underwriting team. When we ask questions about your situation, we are working for you, trying to find the best fit for your insurance needs. We are trying to shop for you and give you accurate prices. We aren't out to somehow manipulate you into paying more than you should for something. We couldn't do that if we tried. Because we don't set rates!

My job as an independent agent is to find the products that are best for you. That's why I am an independent agent and that's why I ask those (sometimes uncomfortable) questions. So take a tip from me when you go shopping for insurance: Let you agent do his job. Answer his questions. Make him work for you. You will be better off!

I Am Your Policy

You and I have purposes in this world, which when are analyzed, are quite similar. It is your job to provide food, clothing, shelter, schooling, medicine and many other things for your loved ones. You do this while I lie packed away. I must have faith and trust in you. Out of your earnings will come the cost of my upkeep. At times I may appear to be somewhat worthless to you, but some day (and who knows when) you and I will change places. When you are laid to rest, I will come alive and do your job. I will provide the food, clothing, shelter, schooling, medicine and other things your family will continue to need just as you are doing now. When your work is done, mine will begin; through me your hands will carry on.

Should you live and care for your family without me, I will really do a job for you. When you reach the golden retirement age, I will go into action and help provide some of the necessary dollars that will be needed when you can no longer work (This refers to using the cash values of a permanent life insurance plan as income through one of the settlement options.) Whenever you feel the price you are paying for my upkeep is a burden, remember that I will do more for you and your family than you can ever do for me. If you do your part, I guarantee to do mine.

How many times do you say "if"...

Mariam-Webster defines the word "if" as follows:

1 a : in the event that b : allowing that c : on the assumption that d : on condition that

2 : whether

3 : used as a function word to introduce an exclamation expressing a wish

4 : even though : although perhaps

5 : and perhaps not even —often used with not

When you are talking about life insurance, the only "if" should fall between the letters "l" and "e" in the word "life"! Life insurance is about three simple, yet powerful concepts: promises, protection and guarantees. This is the reason that life insurance is at the heart of all good financial and retirement planning. It forms the foundation upon which all other financial plans can be be built. In addition to providing much-needed protection for a growing family, it can form the basis for efficient retirement planning strategies. Promises, protection, guarantees: this is why "if" has no place in your discussion of life insurance.

I lend money when you need it most, with no questions asked.

A permanent insurance policy like whole life or universal life has two features that make it the perfect collateral for a loan: death benefit and cash surrender value. These elements, like a house and the equity that an owner has in it, can be used to secure loans that can provide cash for emergencies, business purposes, real estate transactions, personal spending, etc.

Unlike the equity in a home however, borrowing against a life insurance policy is a no-questions-asked proposition. To the extent that a policy owner has equity (cash surrender value) in his policy (and subject to the limits of the actual life insurance contract), a loan can be made without having to qualify for it. The policy owner need only ask for the money and funds are delivered in just a few days.

Many a criticism has been leveled against cash value policies and policy loans. Most often, you will hear a supposed "money guru" like Dave Ramsey or Suze Orman say "You are borrowing your own money! How stupid is that?". But the criticism is completely unfounded. You see, you aren't borrowing your own money--you are borrowing the insurance company's money and using your money (cash surrender value and death benefit) as collateral. Just like you do with a home equity loan. Except that with a life insurance policy loan, you get much more favorable terms. Like, for example, never having to make a payment and zero net financing costs (again, subject to the terms of the specific life insurance contract).

Access to cash surrender values in a life insurance policy has many uses. Whether your need for a loan is for a family emergency, a business opportunity, a real estate deal or some other purpose, you can count on your good old fashioned permanent life insurance policy to be there, ready to loan you money--without asking questions!

Next: I pay off mortgages, so that the family can remain together in their own home.

How to Buy a Life Insurance Policy

What is the best way to go about buying a life insurance policy? What kind should I buy? What things need to be considered? Should I contact an agent, or should I just buy it online? These are just a few of the questions that you might be asking yourself if you think that you might need life insurance.

The process of purchasing a life insurance policy is actually quite simple. In fact, there are some policies that you can purchase directly online, without ever talking to an agent and without ever taking a medical exam. There is one company that offers up to "$250,000 of term life insurance coverage in as little as 15 minutes!". Other policies might require a paper application, a medical exam and a more extensive review of your health, driving and (possibly) financial records. But even a fully underwritten policy like that is relatively easy to buy, especially when compared to the task of determining how much and what kind of life insurance to buy. You can get quotes on term life insurance online, and a good insurance agent can take most of your application information over the phone, schedule your paramedical exam and have the paperwork mailed out to you. So the process is easy, once you determine what you are actually going to buy.

In practical terms the very first question that you need to answer is "For what purpose am I buying life insurance?". Is the coverage being obtained so that your family will have money to live on in the event that they lose you (and the income that you used to earn)? Is life insurance needed to cover "final expenses", e.g. funeral costs? Are the proceeds of a life insurance policy needed to settle an estate or create a charitable gift? Once you have determined the "why" behind your life insurance need, you can move on to the next question, which is "How much?".

Determining an amount is fairly easy if your need is for final expenses, estate settlement or even charitable giving, so I won't spend time here discussing it. More complicated, though, and far more common, is the need for a family to have a death benefit which will be used to replace the income lost if the breadwinner dies. For this purpose, it makes sense to have a death benefit equal to somewhere between 10 and 25 times the income that would be lost. This may seem like a lot of money, but when you factor in things like inflation and "safe" withdrawal rates, it is not. And while I recommend that everybody purchase as much coverage as they need, remember, some coverage is better than none at all. So if you can't afford "full coverage", it still makes sense to provide some protection for your family.

Now that we know "why" and "how much" it is time to ask the question "What kind of life insurance should I buy?". A great deal is made among the "financial gurus" in the media as to which kind of insurance is better, "term insurance" or "permanent insurance". I will suggest to you right here that the very best kind of life insurance is the kind that is in force the day that you die! Trust me when I say this; your grieving family is not going to ask me if the death benefit came from a whole life policy, a term insurance policy, a universal life policy, etc. when I deliver the death claim. It will not matter. What will matter is that there is a check to be delivered. And for that to happen, the policy has to be in force when you pass away.

I can argue the virtues of both term insurance and permanent insurance until the proverbial cows come home, but it doesn't matter. Both have their uses and both are good. Buy the type that you can easily afford. Buy some of both if you can. But make sure that you buy enough! It makes no sense to buy a $100,000 whole life policy if your family will need $1,000,000 to survive. I don't care about the "cash value" you are building up, and neither will they. On the other hand, if you can afford the premiums on a $1,000,000 whole life or universal life policy, by all means, buy it. There are great benefits to be had if you do. But don't skimp on the death benefit just to get there. Besides, when you buy your term insurance from a good agent, he is going to make sure you buy convertible term insurance so that you can, as time and money permit, convert some or all of it to permanent insurance.

In the end, my advice is always to buy "full coverage". That is, what ever the insurance company is willing to sell you. Most of us buy full coverage on our house and on our car; why wouldn't you want it on your life? The "type" of insurance that you buy is, in my opinion, a distant second consideration.

There you go; now that you know how much life insurance you want, why not get a quote on term life insurance as a starting place and then contact me to discuss it?